In some cases, an entity may borrow money from an investor and issue a bond to the investor bearing a stated rate or rates of interest (or a formula that can be used to determine a rate of interest) that will mature on a pre-determined date (e.g., five years after the bond was issued). When the maturity date arrives, the entity re-pays the investor (e.g., the principal and interest).
A mutual fund may pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, and/or other securities. Moreover, a money market fund is a type of mutual fund that may be required by laws or regulations (e.g., regulations of the Securities and Exchange Commission) to invest in relatively low-risk securities. A money market fund may invest in government securities, certificates of deposits, commercial paper of companies, and/or other highly liquid and low-risk securities. By way of example, a money market fund might invest in a tax-exempt municipal bond issued by a highly rated state or local governmental unit.
The requirements imposed on money market funds may limit the types of bonds that the fund can purchase. For example, a fund might be prevented from investing in a bond structure that lacks a guaranteed level of liquidity. The structure of a particular bond may also have tax consequences for a fund or other investors.